Balance of Payments

Question 1

Countries with largest CA surpluses

Answer 1

(EU), China, Germany, Japan, South Korea. Taiwan, Switzerland, Russia, Netherlands, Singapore.

Question 2

Countries with largest CA deficits

Answer 2

USA, UK, Brazil, Australia, Saudi Arabia, Canada, Mexico, Turkey, Algeria, India.

Question 3

UK Export

Answer 3

Something we are selling to foreign countries

Question 4

UK Import

Answer 4

Something we are buying from foreign countries

Question 5

The balance of payments

Answer 5

• A record of all transactions (monetary flows) between one country and the rest of the world.
• In UK, collected by ONS and recorded in the Pink Book.

Question 6

Balance of payments - Current Account

Answer 6

Sum of:

• Trade in goods (i.e. X-M in goods)
• Trade in services (i.e. X-M in services)
• Net Income (i.e. money from investment + employment, e.g. profit, dividends, wages)
• Net current transfers (i.e. movements of money that don’t represent any economic transactions (‘giving money away’?) e.g. aid, donations, subsidies)

Question 7

Balance of payments - Capital account

Answer 7

Sum of:
- Movement of assets through migration (i.e what migrants bring into the UK when they arrive minus what they take with them when they leave, aka credit minus debit)

Question 8

Balance of payments - Financial Account

Answer 8

Sum of:

• Foreign investment - direct (i.e. purchase of assets e.g. capital goods by a UK resident in a foreign country or by a foreign resident in the UK)
• Foreign investment - portfolio (i.e. purchase of financial assets e.g. stocks and bonds, by a UK resident in a foreign country or by a foreign resident in the UK, to generate a return)
• Financial derivatives ??
• Reserve assets (i.e. foreign financial assets controlled by the monetary authorities e.g. foreign currency bought and sold by the Bank of England)

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Question 9

Balance of payments in UK.

Answer 9

• Trade balance and current account are both in deficit, and getting worse.
• CA deficit is second largest in world.
• Capital and financial account are in surplus (as have to make up for huge CA deficit)
• But financial account surplus is much larger than capital account surplus
• We import more than we export to most countries, however to Ireland and the USA its the other way round.

Question 10

Causes of a CA deficit

Answer 10

• Strong pound (as SPICED and decreased price of imports means more imports, and increased price of exports means less exports, leading to a negative trade balance, which implies a CA deficit)
• Increase in international commodity prices if net importer (as demand is most often inelastic so will continue to buy the same or a similar quantity, so more import expenditure, leading to a negative trade balance, which implies a CA deficit)
• High economic growth leading to an increase in domestic income (as means more demand which means more imports, leading to a negative trade balance, which implies CA deficit)
• Low income in our trading partners (as means less demand for UK exports as they can’t afford them, leading to a negative trade balance, which implies CA deficit)
• Rising domestic asset prices e.g. housing (as people have more confidence state of economy, so we import more, leading to a negative trade balance, which implies current account deficit)
• High UK inflation (as means we export less because trading partners can’t afford our goods, leading to a negative trade balance which implies CA deficit)
• Low inflation aboard (as means we import more because goods from our trading partners are so cheap, leading to a negative trade balance which implies CA deficit)